What is a Short-Term Loan?

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What is a Short-Term Loan?

A short-term loan is where the principal amount has to be paid within a short period of time and often less than a year.

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Short terms loans have been designed to cover gaps in cash flow and to also provide much needed funds in the case of an emergency. As the term of the loan is short, the interest rates on this type of loan are a lot higher than a long-term loan.

Short Term Loans for Individuals

Short-term loans for an individual are designed to provide money in between paychecks, to cover the expense of an emergency, a medical expense or even the cost to have your car fixed.

There are some banks and credit unions that offer short-term personal loans, but the more common source for this type of loan is a payday lender.

A payday lender will offer short-term cash advances for until your next paycheck.

Payday loans to carry high interest rates and are strictly governed by states in regards to their terms and conditions.

Credit cards are not referred to as short-term loans, but they operate in a similar way. With a credit card you will only pay the interest on your credit card balance if you do not pay the balance in full at the end of the month.

Short Term Business Loans

Banks may offer short-term business loans to provide finance for startup, to fund a new project, to pay for an emergency or to cover a gap in cash flow.

What to Know About Short Term Loans

Short-term loan terms and conditions will vary, but one constant is there high interest rates.

The higher interest rate is due to the principal not being held on to for a long period of time, so the lender has to charge a high interest rate in order to cover the risk of issuing the loan.

Short-term loans can be become dangerous if you are not able to pay it back on time and this can lead to more interest and fees.

You will need to do your research and know the costs involved before you take a short-term loan.